Definition:
An available-for-sale investment is a debt or equity security that a company intends to hold for more than one year but does not have the intent to hold to maturity. This means that the company may sell the investment at any time to realize a gain or loss.
Key points about available-for-sale investments:
- Fair market value: Available-for-sale investments are reported on the balance sheet at their fair market value.
- Unrealized gains/losses: Changes in the fair market value of available-for-sale investments are reported as unrealized gains or losses in the comprehensive income statement.
- No impact on income statement: Unrealized gains or losses on available-for-sale investments do not affect net income.
- Dividend income: Dividends received from available-for-sale investments are recognized as income.
Why are available-for-sale investments used?
- Flexibility: Available-for-sale investments offer more flexibility than held-to-maturity investments, as they can be sold at any time.
- Income generation: Available-for-sale investments can generate dividend income.
- Fair value accounting: The fair value accounting for available-for-sale investments provides a more up-to-date valuation of the investment.
In essence, available-for-sale investments are debt or equity securities that a company intends to hold for more than one year but may sell at any time. They are reported at fair market value on the balance sheet, and changes in fair value are recognized as unrealized gains or losses in comprehensive income.
